Novated Leasing for small businesses

Part of the challenge of running a small business is finding creative ways to attract and retain great staff. Novated leases are a solid, low-cost solution that can help small businesses provide benefits to new hires and retain talent without committing extra resources or tedious admin.

Let’s look into novated leasing and what it can do for your business.

What is novated leasing?

Novated leasing is a car lease agreement among three parties: a financier, an employee, and their employer. The employee leases a new or used car through a finance company and services the repayments through their employer under a salary sacrifice agreement.

Novation basically means that the employer assumes the employee’s payment obligations, and if employment ends for any reason, those obligations shift back to the employee.

Think of it like a subscription service, but instead of an individual paying for a service, their boss processes the payments with the employee’s pre-tax wages. The employee receives a benefit that reduces their taxable income, and the employer gives their workers extra options for how they use their salary and wages.

Novated Leasing: How It Works

Novated leasing can be broken down into three components: setup, service, and exit.

The initial set-up
The setup involves entering the leasing agreement between the three parties and the salary sacrifice agreement between the employee and employer to service the payments.

The servicing of repayments and fringe benefit tax reporting
There are two servicing responsibilities: firstly, the employer must make ongoing repayments of the novated lease using the employee’s pre-tax salary (funnelled through payroll); and secondly, the employer must meet and report their potential fringe benefit tax obligations if the car is used or available for private use.

Important note: the employee must provide a written agreement and authorisation for the salary sacrifice deductions.

Exit outcomes
There are five key outcomes to a novated lease agreement.

1. Purchase: The employee pays the residual value and owns the car outright.
2. Refinances: The employee extends the lease and continues repayments on a new agreement.
3. Sell: To cover the residual, the employee sells the car. If the sale price is above the residual, the employee keeps the difference; if below, the employee pays the difference.
4. Upgrade: The employee sells or trades the car and enters a new novated lease for an upgraded model.
5. Employee exit: If the employee leaves employment where the novated lease has been arranged, the lease servicing responsibilities shift entirely to the employee. The employer is no longer responsible for the lease.

Novated lease in action

Marty has a worker, Sharon, who has mentioned needing a new car. Sharon is a great worker, and not having a car to commute to and from work could mean she needs to find employment elsewhere.

Marty offers to help by setting up a novated lease agreement with a reputable financier. Sharon agrees:

Agreement:

Car: $40,000
Lease term: 5 years
Residual (at end of term): 11,252

Set-up:

Marty and Sharon create a salary-sacrifice agreement that covers the lease repayments, packaged with ongoing car costs. The financier prepares the lease agreements and related paperwork.

Servicing:

Mart’s payroll team deducts the payments from Sharon’s salary and sends it to the financier. Marty records the FBT obligations as Sharon uses the car for private use.

Exit outcomes:

After the 5-year lease, Sharon has the option to pay the residual of 11,252 (+ GST) to own the car outright, or refinance the lease/upgrade/sell.

At any point during the agreement, if Sharon leaves Marty’s employment, Sharon becomes responsible for the repayments.

Things small business owners should consider

Novated leases can offer flexibility and benefits for both employers and their workers. There are some things to consider before signing any agreement:

1. Fringe benefit tax obligations: When your employee uses the car for private use, then employers need to report and calculate the fringe benefit tax on the value of the car. It’s worth noting that after-tax contributions can limit your FBT payments and exposure (potentially to 0).
2. Salary sacrifice agreement terms: For any salary sacrifice agreement, there must be a detailed written agreement between the employer and the employee. The ATO has strict standards for how to structure a salary sacrifice agreement.
3. Vehicle choice: Normal combustion engine cars (ICE-cars) are subject to FBT, but certain electric cars (EVs) are exempt. Talk with a novated lease company (oly link) to find out more.

The benefits of novated leasing for small business owners

There are plenty of benefits that come from novated leases. Here are some of the main ones:

• Perks for hiring and retaining staff: It adds a whole new dimension to what you can offer your employees.
• GST credit outcomes: You may be able to claim GST credits on lease repayments, depending on your GST entitlement and the arrangement’s setup. As always, double-check with your accountant.
• Reduced liability: The novated lease is tied to three parties — you, your employee and the leasing company. Payments come out from your worker’s pre-tax salary, but if they move on from your employment, the entirety of the lease follows them, giving you a clean exit with no further obligation.

With the benefits in mind, let’s look into detail how it all works.

Oly and your small business

If you’re looking for a low-cost way to provide more benefits to your employees, novated leasing could be a good option. With dedicated payroll software, you can easily set up your salary-sacrifice agreements with your employees and report FBT.

If admin is a problem, oly (insert oly link) has you covered. oly helps with the paperwork, which can make set-up, servicing, and reporting a breeze for every small business. With novated leasing, you can make your hiring benefits stand out while also offering more to retain your most talented staff.